The Fed Just Cut Interest Rates, And More Rate Cuts Are Coming
by Jason Schenker · ForbesThe Federal Reserve announced an interest rate policy decision to cut interest rates by 0.5% on September 18. This decision was accompanied by FOMC member forecasts, which reflect expectations of additional Fed interest rate cuts through the end of 2026.
Federal Reserve Cuts Interest Rates
The Federal Reserve cut the federal funds rate today by 0.5%, targeting a range between 4.75% and 5%. An interest rate cut was largely expected across markets, as seen in the CME FedWatch Tool. However, market expectations were divided between a 0.25% and a 0.5% rate cut.
A rate cut of 0.5% is bigger than many market participants had expected, and it is likely to be the beginning of a trend in additional monetary policy accommodation as the Fed cuts interest rates further in the years ahead.
The Fed has a dual mandate to foster full employment and keep prices low and stable. Given the relatively solid labor market but elevated consumer inflation, future interest rate cuts are coming, although the Fed still has the license to cut interest rates slowly.
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Federal Reserve Forecasts Reflect Future Rate Cuts
Investors, economists, and business leaders anticipated an interest rate cut on September 18. They were also eagerly awaiting the quarterly forecasts of the Federal Open Market Committee, especially the FOMC member median forecasts of future interest rates.
Accompanying the September 18 Fed decision, FOMC forecasts were released in a table with interest rates, GDP growth, PCE inflation, and the unemployment rate. The forecasted interest rates also appeared in a graphic depiction that economists and investors refer to as the dot plot, which shows anonymized individual FOMC member forecasts of future interest rates.
As Prestige Economics expected, the dot plot of median FOMC member forecasts conveyed that Fed members expect to enact additional rate cuts in 2024 and 2025.
The last set of FOMC forecasts was released in June 2024. The FOMC median forecast of interest rates was 5.1% for the end of 2024, 4.1% for the end of 2025, and 3.1% for the end of 2026.
The updated September FOMC median forecast of interest rates was lowered to 4.4% for the end of 2024, lowered to 3.4% for the end of 2025, and lowered to 2.9% for the end of 2026.
Fed member forecasts of future real GDP growth remain relatively positive and inflation is expected to improve more than previously forecast. Unemployment is expected to be weaker than previously forecast.
The median FOMC forecast for Q4 2024 unemployment rate was raised to 4.4% from 4%. Meanwhile, the median year-on-year real GDP forecast for Q4 2024 was lowered slightly to 2% from 2.1%.
On the upside, the median FOMC forecast for Q4 2024 and Q4 2025 year-on-year PCE and Core PCE inflation improved, although they are expected to remain above the Fed's 2% target in both Q4 2024 and Q4 2025.
Market Implications
The September Fed rate cut was bigger than some investors had expected, even though the CME FedWatch Tool had reflected the 65% chance of a 0.5% rate cut as of 9:30 a.m. ET on September 18.
A larger-than-expected interest rate cut often presents upside risks to equity and bond prices while weighing on the dollar. Plus, the September interest rate cut is expected by the FOMC to be one of many cuts, which is also supportive of equity and bond prices and bearish for the greenback. This is especially true, given the FOMC forecasts of more interest rate cuts than previously published.
As always, this isn’t the end of the Fed’s story today, and a great deal of attention will be paid to Fed Chair Jerome Powell's remarks in his 2:30 p.m. ET press conference on September 18, especially about the timing of future additional Fed interest rate cuts.
What do you think of the September 2024 Fed policy decision and FOMC member forecasts?
Let me know in the comments below.
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